Istanbul, Munich and Warsaw are the new hotspots for property investors and developers, as much of Europe remains mired in a vicious cycle of low or no growth, mounting debt and drastic austerity measures.

London – usually seen as the gold standard of real estate – has lost some of its allure and is now just hanging on at the bottom of the top 10, according to a report by PricewaterhouseCoopers and the Urban Land Institute. The UK capital is regarded as "too expensive for the economic outlook" by many. But nowhere can be considered a "must buy" today, the report said, highlighting that Europe's economic crisis has left the property sector in limbo, with fast-diminishing access to bank loans and depressed rental demand.

"It's going to be a volatile market across the board," said John Forbes, real estate partner at PwC and author of the report. "Investors realised there's no point in hanging around and waiting for an upturn because there wasn't one coming."

He believes that regulatory changes forcing banks to sell off risky assets will create opportunities, in particular for equity investors less reliant on debt. Also, insurers and pension funds are beginning to step in and offer finance, although they will not be able to fully plug the gap left by banks unwilling to fund property investments.

Istanbul held on to the top spot for new investment and development prospects for the second year running, thanks to its booming economy and youthful population. Munich, with one of the lowest unemployment rates in Germany, came second, rated for its stability, followed by Warsaw, which is rapidly becoming eastern Europe's financial hub, boosting the city's office sector.

Berlin was Europe's most attractive market for residential investment, and Stockholm, Paris, Hamburg and Zurich were favourites for investors picking safe cities. Moscow made it into the top 10 for the first time, just ahead of London.

London fell to 10th from second place, reflecting investors' feelings that the city is overpriced and will see very little appreciation of property values. Strong competition is another factor. "Today London is the safest of havens that there is. But once the world is again stable and everyone pulls their money back home, that's when we will see how oversold it is," said one interviewee.

Paris also slipped in the survey's rankings, but less than London because it is less reliant on banking and financial services.

London's prime assets still attract a lot of demand from overseas, and for the first time more than half the office buildings in the City are foreign-owned, according to a study by Development Securities. South African billionaire Nathan Kirsh acquired Tower 42 and nearby buildings for £283m in December, while Asian palm oil billionaires Kuok Khoon Hong and Martua Sitorus bought Aviva's headquarters for £288m last June.

Forbes said bargain hunters would turn to places like Dublin and Madrid. "You don't make money by following the consensus."

He said: "Debt will be the main story of 2012. There is general pessimism regarding the availability of debt this year, and significantly, lenders are the gloomiest of all." Just 6% of lenders believe that debt will be as available as it was last year, with 52% believing it will be substantially less.